ServiceSource Reports Fourth Quarter and Full Year 2012 Financial Results

SAN FRANCISCO, CA--(Marketwire - Feb 6, 2013) - ServiceSource^® (NASDAQ: SREV)

• Reports fourth quarter revenue of $67.3 million and full year revenue of $243.7 million, up 11% and 19% year-over-year, respectively

• Achieves 2012 adjusted EBITDA of $20.9 million, up 17% year-over-year, and non-GAAP EPS of $0.10 per diluted share

• Adds Beckman Coulter, Intralinks and Rockwell Automation to growing list of customers; notable expansions include Adobe Marketing Cloud, Avaya and GE Healthcare, among others

• Increases Annual Contract Value (ACV) to $270.4 million, up 13% year-over-year

ServiceSource^® (NASDAQ: SREV), the global leader in recurring revenue management, today announced financial results for the fourth quarter and fiscal year ended December 31, 2012.

"ServiceSource delivered a record year of revenue in 2012 resulting in 19% year-over-year growth, despite ACV that was heavily back end loaded," said Mike Smerklo, ServiceSource's Chairman and Chief Executive Officer. "Recurring revenue continues to grow as a percent of total revenue for companies around the world and this trend drives a growing interest in Renew OnDemand, the world's only cloud application built specifically to maximize recurring revenue. Our focus in 2013 is on investing in Renew OnDemand for innovation, improving productivity in our sales organization and executing with consistency."

Revenue was $67.3 million in the fourth quarter, representing an 11% increase over the $60.8 million delivered in the prior year. Revenue for the full year 2012 was $243.7 million, up 19% from $205.5 million in 2011.

For the fourth quarter of fiscal year 2012, adjusted EBITDA was $8.3 million, compared with $9.3 million for the same period last year. GAAP net loss in the quarter was $1.2 million, or $0.02 per share, compared with a profit of $1.7 million, or $0.02 per diluted share for the same period last year. Non-GAAP net income in the quarter was $3.6 million compared with $4.6 million for the same period last year. Non-GAAP EPS was $0.05 per diluted share, compared with $0.06 per diluted share for the same period last year.

For the full year 2012, adjusted EBITDA was $20.9 million, compared with $17.8 million for fiscal year 2011. GAAP net loss for the year was $42.8 million, or $0.58 per share, compared with a profit of $15.1 million, or $0.21 per diluted share for 2011. Non-GAAP net income for the year was $7.9 million, compared with $6.5 million in 2011. Non-GAAP EPS was $0.10 per diluted share, compared with $0.09 per diluted share for 2011.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in this press release.

In addition, the company has named Ashley Fieglein Johnson to the role of Chief Financial Officer effective upon the filing of the company's fiscal year 2012 Form 10-K. Current CFO, David Oppenheimer, announced his departure in December of 2012. Previously, Ms. Johnson held the role of Senior Vice President of Finance at ServiceSource.

Quarterly Conference Call

ServiceSource will discuss its quarterly results and provide 2013 financial guidance today via teleconference at 1:30 p.m. Pacific Time. To access the call within the U.S., please dial (877) 293-5486, or outside the U.S. (914) 495-8592, at least five minutes prior to the start time. A live webcast of the call will also be available at http://ir.servicesource.com/events.cfm under the Events & Presentations menu. A replay of the webcast will also be available on the Company's website at http://ir.servicesource.com.

About ServiceSource International, Inc.

ServiceSource is the global leader in recurring revenue management. The world's most successful companies rely on us to maximize subscription, maintenance and support revenue, improve customer retention and increase business predictability and insight. ServiceSource delivers results with Renew OnDemand, the world's only cloud application built specifically to manage and grow recurring revenue, which can be combined with our industry-leading services.

With over a decade of experience focused exclusively in growing recurring revenue, our services and applications are based on proven best practices and global benchmarks. The company is headquartered in San Francisco, and has over $8 billion under management for customers in more than 150 countries and 40 languages.

ServiceSource, Renew OnDemand and any ServiceSource product or service names or logos above are trademarks of ServiceSource International, Inc. All other trademarks used herein belong to their respective owners.

For more information on ServiceSource, visit http://www.servicesource.com. To connect with ServiceSource, visit us on Twitter, Facebook, LinkedIn and YouTube.

ServiceSource International, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
			Three Months Ended								Years Ended
			December 31,								December 31,
			2012				2011				2012				2011
Net revenue			$	67,345			$	60,779			$	243,703			$	205,501
Cost of revenue (1)				35,319				31,007				136,321				113,406
Gross profit				32,026				29,772				107,382				92,095
Operating expenses
	Sales and marketing (1)			15,767				13,856				56,925				48,520
	Research and development (1)			5,960				3,423				19,255				13,073
	General and administrative (1)			10,496				8,955				41,135				33,647
Total operating expenses				32,223				26,234				117,315				95,240
Loss from operations				(197	)			3,538				(9,933	)			(3,145	)
Interest expense				(56	)			(51	)			(236	)			(503	)
Other income (expense), net				(414	)			(65	)			(538	)			(624	)
Loss before income taxes				(667	)			3,422				(10,707	)			(4,272	)
Income tax provision (benefit)				518				1,769				32,107				(19,383	)
Net income (loss)			$	(1,185	)		$	1,653			$	(42,814	)		$	15,111
Net income (loss) per common share:
	Basic		$	(0.02	)		$	0.02			$	(0.58	)		$	0.23
	Diluted		$	(0.02	)		$	0.02			$	(0.58	)		$	0.21
Weighted-average shares used in computing net income (loss) per common share:
	Basic			75,090				71,602				74,270				66,656
	Diluted			75,090				77,823				74,270				73,585
(1) Includes stock-based compensation expense as follows:
			Three Months Ended								Years Ended
			December 31,								December 31,
			2012				2011				2012				2011
Cost of revenue			$	722			$	591			$	2,772			$	1,877
Sales and marketing				2,310				1,475				8,146				4,456
Research and development				425				303				1,880				1,167
General and administrative				2,158				1,126				8,077				4,099
Total stock-based compensation			$	5,615			$	3,495			$	20,875			$	11,599

ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
			December 31,
			2012				2011
Assets
Current assets:
	Cash and cash equivalents		$	76,568			$	65,983
	Short-term investments			32,874				42,882
	Accounts receivable, net			65,238				54,095
	Current portion of deferred income taxes			389				3,526
	Prepaid expenses and other			5,178				7,945
Total current assets				180,247				174,431
Property and equipment, net				34,513				26,840
Deferred income taxes, net of current portion				2,321				30,238
Other assets, net				1,057				1,118
Goodwill				6,334				6,334
Total assets			$	224,472			$	238,961
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	3,293			$	8,617
	Accrued taxes			1,056				924
	Accrued compensation and benefits			15,738				21,749
	Other accrued liabilities (including deferred revenue of $2,295 and $1,132 at December 31, 2012 and December 31, 2011, respectively)			10,403				7,639
	Current portion of capital lease obligations			326				706
Total current liabilities				30,816				39,635
Long-term liabilities				6,729				2,310
Total liabilities				37,545				41,945
Stockholders' equity:
	Common stock			8				7
	Treasury stock			(441	)			(441	)
	Additional paid-in capital			210,650				177,796
	Retained earnings (accumulated deficit)			(23,398	)			19,416
	Accumulated other comprehensive income			108				238
Total stockholders' equity				186,927				197,016
Total liabilities and stockholders' equity			$	224,472			$	238,961

ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
			Years Ended
			December 31,
			2012				2011
Cash flows from operating activities
Net income (loss)			$	(42,814	)		$	15,111
Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Depreciation and amortization			10,014				9,372
	Loss on disposal of fixed assets			-				46
	Amortization of deferred financing costs			147				351
	Accretion on premium on short-term investments			577				276
	Deferred income taxes			31,682				(19,259	)
	Stock-based compensation			20,875				11,599
	Tax benefit from stock-based compensation			(1,488	)			(2,835	)
Changes in operating assets and liabilities:
	Accounts receivable			(10,714	)			(4,972	)
	Prepaid expenses and other			4,067				(3,164	)
	Accounts payable			(2,477	)			2,235
	Accrued taxes			(802	)			2,064
	Accrued compensation and benefits			(5,290	)			6,617
	Accrued payables to customers			-				(30,640	)	*
	Other accrued liabilities			6,859				1,968
Net cash provided by (used in) operating activities				10,636				(11,231	)
Cash flows from investing activities
Acquisition of property and equipment				(19,986	)			(14,050	)
Purchases of short-term investments				(64,000	)			(53,795	)
Sales of short-term investments				52,050				2,113
Maturities of short-term investments				21,415				8,190
Net cash used in investing activities				(10,521	)			(57,542	)
Cash flows from financing activities
Net proceeds from issuance of common stock in initial public offering and follow-on offering				-				110,753
Proceeds from revolving credit facility				-				23,424
Repayment of revolving credit facility				-				(23,424	)
Repayments of long-term debt and capital leases				(725	)			(16,252	)
Payments of deferred debt issuance costs				(141	)			(200	)
Proceeds from common stock issuances				10,387				15,045
Tax benefit from stock-based compensation				1,488				2,835
Net cash provided by financing activities				11,009				112,181
Net increase in cash and cash equivalents				11,124				43,408
Effect of exchange rate changes on cash and cash equivalents				(539	)			(77	)
Cash and cash equivalents at beginning of period				65,983				22,652
Cash and cash equivalents at end of period			$	76,568			$	65,983
* Activity in 2011 resulted from $18.1 million in payments to Oracle/Sun and the related settlement of accrued payables owed to Oracle/Sun and amounts owed to the Company by Oracle/Sun.

Use of Non-GAAP Financial Measures

To supplement its financial statements presented in accordance with generally accepted accounting principles, or GAAP, ServiceSource also provides investors with non-GAAP gross profit, net income, net income per share and Adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the closest GAAP financial measure is presented in the financial tables below under the heading, "GAAP to Non-GAAP Reconciliation."

ServiceSource believes that the non-GAAP financial information provided in this release can assist investors in understanding and assessing its on-going core operations and prospects for the future and provides an additional tool for investors to use in comparing ServiceSource's financial results with other companies in the industry, many of which present similar non-GAAP financial measures to investors.

Non-GAAP gross profit consists of gross profit plus stock based compensation and amortization of internally-developed software.

Non-GAAP net income consists of net income (loss) plus stock-based compensation, amortization of internally-developed software and applying an income tax rate of 40% reflecting our estimated tax expense on our core operations. Accordingly, our non-GAAP calculation of net income has excluded a one-time, non-cash income tax charge of $33.1 million recorded during the period ended June 30, 2012 related to a valuation allowance for a substantial portion of the company's deferred tax assets. Results for the year ended December 31, 2011 reflect a one-time tax benefit related to the conversion of ServiceSource from a limited liability corporation to a Delaware corporation, which has also been excluded from the calculation of non-GAAP net income. Stock-based compensation expense is expected to vary depending on the number of new grants issued, changes in the company's stock price, stock market volatility, expected option lives and risk-free rates of return, all of which are difficult to estimate.

EBITDA consists of net income (loss) plus depreciation and amortization, interest expense, other expenses, net, and income tax expense. Adjusted EBITDA consists of EBITDA plus non-cash, stock-based compensation expense. ServiceSource uses Adjusted EBITDA as a measure of operating performance because it assists the company in comparing performance on a consistent basis, as it removes from the operating results the impact of the company's capital structure.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States.

ServiceSource International, Inc.
Reconciliation of Net Income (Loss) to Adjusted EBITDA
(In thousands)
(Unaudited)
		Three Months Ended							Years Ended
		December 31,							December 31,
		2012				2011			2012				2011
Net income (loss)		$	(1,185	)		$	1,653		$	(42,814	)		$	15,111
Income tax provision (benefit)			518				1,769			32,107				(19,383	)
Interest expense			56				51			236				503
Other income (expense), net			414				65			538				624
Depreciation			2,922				2,263			10,003				9,372
EBITDA			2,725				5,801			70				6,227
Stock-based compensation			5,615				3,495			20,875				11,599
Adjusted EBITDA		$	8,340			$	9,296		$	20,945			$	17,826

ServiceSource International, Inc.
GAAP To Non-GAAP Reconciliation
(Dollars in thousands, except per share amounts)
(unaudited)
						Three Months Ended								Years Ended
						December 31,								December 31,
						2012				2011				2012				2011
Gross Profit
	GAAP gross profit					$	32,026			$	29,772			$	107,382			$	92,095
	Non-GAAP adjustments:
		Stock-based compensation		(A)			722				591				2,772				1,877
		Amortization of internally-developed software		(B)			577				261				1,467				1,457
	Non-GAAP gross profit					$	33,325			$	30,624			$	111,621			$	95,429
Gross Profit %
	GAAP gross profit						48	%			49	%			44	%			45	%
	Non-GAAP adjustments:
		Stock-based compensation		(A)			1	%			1	%			1	%			1	%
		Amortization of internally-developed software		(B)			1	%			0	%			1	%			1	%
	Non-GAAP gross profit						49	%			50	%			46	%			47	%
Certain totals do not add due to rounding
Operating Expenses
GAAP operating expenses						$	32,223			$	26,234			$	117,315			$	95,240
Stock-based compensation				(A)			(4,893	)			(2,904	)			(18,103	)			(9,722	)
Amortization of internally-developed software				(B)			(412	)			(554	)			(1,579	)			(2,477	)
Non-GAAP operating expenses						$	26,918			$	22,776			$	97,633			$	83,041
Net Income (Loss)
	GAAP net income (loss)					$	(1,185	)		$	1,653			$	(42,814	)		$	15,111
	Non-GAAP adjustments:
		Stock-based compensation		(A)			5,615				3,495				20,875				11,599
		Amortization of internally-developed software		(B)			989				815				3,046				3,934
		One-time tax items		(C)			-				-				33,072				(20,740	)
		Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate		(D)			(1,857	)			(1,324	)			(6,251	)			(3,417	)
Non-GAAP net income						$	3,562			$	4,639			$	7,928			$	6,487
Diluted Net Income (Loss) Per Share
	GAAP diluted net income (loss) per share					$	(0.02	)		$	0.02			$	(0.58	)		$	0.21
	Non-GAAP adjustments:
		Stock-based compensation		(A)			0.07				0.04				0.26				0.16
		Amortization of internally-developed software		(B)			0.01				0.01				0.04				0.05
		One-time tax items		(C)			-				-				0.42				(0.28	)
		Income tax effect on non-GAAP adjustments as well as the impact of normalizing the effective income tax rate and calculating non-GAAP net income per share using a fully-diluted share count		(D)			(0.02	)			(0.01	)			(0.05	)			(0.05	)
Non-GAAP diluted net income per share						$	0.05			$	0.06			$	0.10			$	0.09
Shares used in calculating diluted net income per share on a non-GAAP basis							77,831				77,823				79,093				73,585

Footnotes to GAAP to Non-GAAP Reconciliation
(A)	Stock-based compensation. Included in our GAAP presentation of cost of revenue and operating expenses, stock-based compensation consists of expenses for stock options and awards and purchase rights under our stock purchase plan. We exclude stock-based compensation expense from our non-GAAP measures because some investors may view it as not reflective of our core operating performance as it is a non-cash expense.
(B)	Amortization of internally-developed software. Included in our GAAP presentation of cost of revenue and operating expenses, amortization of internally-developed software reflects non-cash expense for certain software purchases and software developed or obtained for internal use. We exclude these expenses from our non-GAAP measures because we believe they are not indicative of our core operating performance.
(C)	One-time tax items. We elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code, effective March 1, 2011, and therefore became subject to federal and state tax expense beginning March 1, 2011. As a result of this tax election, we recorded a net deferred tax asset and a one-time non-cash tax benefit of $21.4 million in the first quarter of 2011. During the second quarter of 2012, we recorded a $33.1 million non-cash charge against a substantial portion of our deferred tax assets, much of which was recorded in connection with electing to be treated as a corporation, because the recoverability of these items for financial reporting purposes is uncertain. We have excluded these items from our non-GAAP measures because they are non-recurring and unique, they are non-cash in nature and are not indicative of our core operating performance.
(D)	Income tax effect on non-GAAP adjustments as well as the impact of normalizing the effective income tax rate and calculating non-GAAP net income per share using a fully-diluted share count. This adjusts (i) the provision for income taxes to reflect the effect of the non-GAAP items A, B and C noted above on our non-GAAP net income; (ii) the income tax rate to a normalized effective tax rate of 40%; and (iii) non-GAAP earnings per share based on a fully-diluted share count.

ServiceSource International, Inc.
Revenue by Segment
(In thousands)
(unaudited)
		Three Months Ended December 31,
		2012						2011
					% of						% of
		$			Revenue			$			Revenue
NALA		$	39,320		58	%		$	39,047		64	%
EMEA			21,478		32	%			16,732		28	%
APJ			6,547		10	%			5,000		8	%
		$	67,345		100	%		$	60,779		100	%
		Years Ended December 31,
		2012						2011
					% of						% of
		$			Revenue			$			Revenue
NALA		$	150,041		62	%		$	127,430		62	%
EMEA			66,902		27	%			58,344		28	%
APJ			26,760		11	%			19,727		10	%
		$	243,703		100	%		$	205,501		100	%